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Private Equity

2024-2-22, Michael Thompson

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Private Equity

Tony Robbins recently released his 3rd book on investing: “The Holy Grail of Investing.” Among other things, the book advertises private equity, which was previously only accessible to institutions and high net worth investors. We thought it would be a good time to discuss private equity as many readers may be drawn to it in the near future.

What is private equity

Private equity (PE) is a share of ownership of a private company. Unlike public equity, shares are not traded on a public stock market. Instead, individuals form a private equity firm that buys one or more businesses, typically using a lot of debt.

Although this is changing, PE investments were traditionally limited to very high net worth individuals and institutions. This is because they have very high minimum investments, well into the 6 or 7 figures. Investors are also required to be accredited (earn over $200k year or have over $1M in liquid assets, but this is also changing). Investors must commit their capital for long time frames, typically 3 to 15 years. The money is not accessible in the meantime, shares can’t be sold on the stock market.

Private equity firms typically sell the businesses after 3 to 15 years, at which time the proceeds are paid to the investors. Investors may also receive periodic payments through the life of the investment, akin to dividends with public stocks.

Private equity returns

Investors in PE expect to outperform public markets. For one, these investors are sacrificing liquidity compared to investing in the public stock market. All else equal, investors expect higher returns when sacrificing liquidity or risk. We’ll get to risk in a later section, but let’s look at historical returns.

Private equity returns are not as transparent as public equity. However, there is some information we can use. One measure of US PE returns is the Cambridge Associates Private Equity Index, which has seen 13.2% annual returns over the 25 years ending in 2023. This index includes about 9,800 US PE funds whose managers provided data to Cambridge. (I’m unsure if this data is protected from a bias, e.g. if managers chose not to self report funds with disappointing performance.)

Other data sources are retirement funds that publicize their returns. While these include a smaller number of PE investments, they should at least be immune to the potential bias mentioned above. Indeed, these funds tend to report lower annual returns than Cambridge. For example, the California Public Employees’ Retirement System aims to invest 10% of its capital in PE. Since inception (around 1998), the program claims to have earned about 11% annualized from its 800 PE investments.

Given the limited amount of US PE data and the variation within, historical returns are not statistically different from the S&P 500, which has returned 11.7% annually since 1928. Another public index you may want to compare to is US small cap value stocks with 17.5% annual returns.

It’s worth noting here that private equity uses more debt than public, often with little or no hedge against interest rate increases. Hence, in rising rate environments, PE returns may decrease more than public equity.


The amount of risk in PE is debatable. If you measure risk by looking at historical drawdowns, it won’t work well here. There are no month-by-month (or even year-by-year) trading prices to compare with publicly traded companies. Using interim valuations of these investments, e.g. as provided by general partners’ (GPs), is questionable at best. GP valuations exclude emotional and other factors that heavily impact publicly traded share prices.

One argument that PE is riskier is that PE-backed companies carry more debt. PE-controlled companies typically carry more debt and they’ve mostly failed to hedge against interest rate increases. There are indications that PE firms have struggled for funding recently, and in some cases taken on debt with interest rates up to 19%!

On the flip side, some studies indicate that PE-backed companies fare better in economic downturns. This is based on business fundamentals, not GP valuations.

Tony Robbins Historical Investment Recommendations

When reading Tony’s book, readers should be aware that the advice is not bulletproof. Despite his access to “top investors,” his recommendations have not been great historically. In 2010, he scared investors out of the stock market after explaining his discussions with expert investors. The market performed very well for years afterward and this cost some people substantial money.

In 2017 he released his second book on investing: “Unshakable.” In it, he made a good case for index funds that helped many investors avoid unnecessary fees and boost returns. From my point of view, a downside was his praise of Ray Dalio’s “All weather portfolio.” Many people attempted to mimic the portfolio and received neither high returns nor downside protection. Since that book was published the portfolio has returned 4.4% per year and had a 25% drawdown in 2021-2022 (the S&P 500 has returned almost 12% per year in the same time frame). As of the time of this writing, that portfolio is 14% below its 2021 value.

I’m not picking on Robbins or Dalio, only repeating what’s been said many times before: chasing “expert” picks or portfolios rarely works. Investing is unlike tennis, basketball, or engineering in this way. A professional tennis player will defeat an average opponent by a large margin essentially 100% of the time. However, professional investors struggle to beat simple index funds, even by a small margin, more than 50% of the time.

Conflict of interest

Readers should be aware that Robbins has a conflict of interest in this book. He is a shareholder in CAZ investments, a PE firm he strongly recommends. The book includes the disclaimer: “Mr. Robbins and Mr. Zook have a financial incentive to promote and direct business to CAZ investments.” So if you find yourself sold on PE or CAZ investments please take a minute to think everything through before acting, you’ve been talking to the salesman at the dealership.


US private equity provides an expectation for higher annual returns than public equity, in exchange for a lack of liquidity, typically for 3-15 years. Average returns over the last 25 years indicate that US PE has performed comparable to the S&P 500. The amount of risk in public equity is contested; payouts over the next decade will reveal how well PE held up when interest rates increased, which could be their achilles heel.

Tony Robbins new book “The Holy Grail of Investing” offers high praise of PE, but with admitted conflicts of interest. Although most investors could not access PE previously, the doors are opening. Investors with free time might want to investigate PE further, but realize it’s no guarantee for outperformance.

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